Case Examples

Case Example 1

This is a case example of a Property Development company currently in Administration with all property assets sold, the IRHP miss sale claim left as ‘other asset’.

The reason for the extension of the Administration is to deal with the FCA Review

The company Directors provided evidence that the sale was advised in June 2008, by the bank ‘expert’ to them, a ‘Retail’ client, who should have enjoyed the FSA COBS protection for authorised sales and the rules of ‘how to sell these products’

Overview

Loan Offer in April 2008 lending of £6m on a £8.5m mixed Development and Property Portfolio was offered. Pricing was 1% plus BoE, refinance deal, including some existing bank lending and lending from other institutions. Terms of loan were on a 70% loan to value basis with any 70% sales proceeds to go back to the loan. Security requested was legal first charges on the properties, a debenture and cross company guarantees (3 in total). The IRHP was not a condition of the loan offer.

Interest Rate Hedging Product Sale Presentations were made after the loan offer by a qualified sales person but before the loan was drawn down. The adviser was recommended by the Relationship Director. It was not instigated by the company, its officers or its advisers. The illustrations produced showed advice for products based on various interest rate swap products but never a straight forward Cap. No accurate break costs were illustrated. No Liabilities were disclosed. No need for credit underwriting requirement was discussed or disclosed. The salesperson hounded the Directors with emails and paper clippings from the FT and Telegraph stating rates were ‘to rise’. The term was recommended as 10 years – ‘over hedged’ by 1000% – a ten year IRHP recommended on a one year loan term.

Advice or Conditioned ? Instructed  by the bank manager 5 working days before the loan offer was due to expire came in the form of an email, at a time when valuations (bank selected and instructed) were undertaken and legal documents were being finalised for drawdown – email from the bank manager stated “Below are the properties and values. This gives the loan at £5,974k. We need to have some hedging in somewhere to protect the repayment cover. I have already told credit we are on with this !!”

Derivatives Expert Report produced just days before the FCA IRHP fact find meeting, commissioned by the IP, the report showed many shocking realities, including for the first time the fact the company actually sold the bank a Cap. The expert evidence illustrated that embedded within the IRHP contract was a Cap sold by the company to the Bank at a premium cost of circa £80,000. It illustrated some important facts about the IRHP advised;

  • Cap sold by the customer to the bank embedded in the IRHP; quote “to be clear, across our combined experience of 40 years in the financial and derivatives markets, we have not come across a situation whereby an SME borrower has or should need to sell an interest rate cap to their Bank”  This means that the product provided no protection as if rate were to have increased then the Cap would only benefit the bank, not the customer, who would continue to track the increasing interest rate payable
  • Callable two-tier Swap, bank only callable option – this allows the bank to cancel the Swap on a set future date at no cost to either party; customer or bank
  • Over Hedged by 10 years IRHP v 1 year Loan
  • Cap, for the customer that was not offered, to match the loan, would have cost £18,695
  • The product was described as a ‘speculative instrument’
  • Bank generated income worth £117,831 too much profit or 2731% more profit than if it had provided a cap to match the loan
  • The company was deemed to be £1,463,272 worse off or 7827% compared to if the bank had provided a cap to match the loan
  • A contingent liability of circa £725,000 would have been required to provide the IRHP product. This contingency liability would have increased significantly as the Bank of England base rate lowered to just 0.5% within months of the sale (by March ’09).
  • The immediate next day break cost (MTM) was circa £122,000k

Could the contract be cancelled  Yes – at no cost to either the bank or the customer on the callable date (year 3 anniversary). Only the bank had the option but for some unknown reason it decided not to cancel the contract and leave it in place to the disadvantage of the customer

Audit Requests as part of the annual audit request the company’s accountants followed standard PN16 templates and requested details of any Derivative and Commodity Trading, the answer was ‘none’

Administration Appointment made by the bank in Sept 2011 after the bank instigated a valuation report from the same company it employed in 2008 to lend the money. This report came in with an average valuation reduction of 65%, in broad terms the valuations went from £8.5m to £3.5m on a valuation with incorrect information and a blatant conflict of interest as one of the authors was written off as a bad debt of the very business who’s asset he was valuing in the previous year. The company was not in default, never missed a loan payment, never missed an IRHP payment (last monthly payments circa £18k on top of loan payments), had no CCJ’s or ‘none manageable’ amount of creditors. The bank refused to discuss the valuations and appointed their own IP agents within a matter of days

Situation now

The company has completed its FCA IRHP Fact Find and awaits the decision in respect to any redress due. The meeting took around 6 hours and included an array of paper evidence submissions and statements from previous Directors and the Company. The Directors Statement on entering Administration was submitted as it detailed back in 2011 (before the review and known miss sale of IRHP’s being public) that the banks sole objective was the IRHP and how it would not cancel the product. Press cuttings of JV PR ventures in 2010 were submitted to evidence the banks stating the success of the company and its continued support. Emails and correspondence made up a large file of information that without the Directors effort and preparation would not have been part of the review and likely omitted from the process.

Litigation

The rights to Litigate will pass on the 6th year – June 2014

Redress Due and Treatment in the Insolvency 

tba

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6 thoughts on “Case Examples

  1. Studying the the forward curve at the date of sale explains the banks motive in selling such a bizarre contract. It was not hedging. The client was being induced to speculate on dangerously risky terms. The bank’s trader would have certainly known this, and most probably the salesman. This was an organised process created by banks for short term profit, irrespective of risk to both client and also bank!

  2. Few observations:

    1) As a general point the day one MTM is equal to profit taken (assuming minimal overnight market movement)
    2) I can’t think of a single case where a sold cap would be appropriate for an unsophisticated investor. That said the premium received in this instance would have outweighed any payments made by the customer to date by a significant amount.
    3) The over-hedge is not satisfactory but the short dated nature of the loan is unusual.
    4) Odd that a 1 year loan on a property deal, and BoE refi rate doesn’t exist IME. Was this a bridge to longer term financing?
    5) Odd that a property deal didn’t include IRHP as CoL
    6) The income generated appears inappropriate. Driver for the deal?
    7) All that said, and despite the complexity, in reality what the customer was left with was a discounted swap (because of the “income” from the sold cap, and sold bank cancellable option).
    8) I assume you have a standstill agreement in place, and have agreed suspension of payments with the bank?

    In summary it just looks like a very odd package – sounds like a bank callable with embedded cap. Little or no chance that it will be found suitable. If no legitimate CoL then it is likely to be full tear-up. If the CoL stacks up (and not withstanding the short term nature of the loan – this doesn’t “feel” right) redress may be to a alternative product – probably a swap.

    • IRHP Mis_Sell thank you. Many good observations.

      reply to questions

      4) the Loan was not a bridging term it was a long term commitment by the bank, detailed as much in emails, but placed on a short term while developments were ‘on-going’ within a larger pre-agreed facility to borrow over two more stages post dated to match known Early Redemption Penalties on additional Buy To Let loans – dates of which would allow redemption without cost
      6) this remains a mystery
      8) redemption (MTM) occurred in 2011 on Insolvency, bank appointed based on new asset values by a bank appointed Surveyor. This has issues as one of the Authors has a conflict of interest and the valuations were factually incorrect. We feel it sad as the bank refused to take these into account and proceeded to appoint an Administration in any event; so the IRHP MTM was added to the banks indebtedness shortly after the IP was appointed, just under £1m cost. The standstill is down to the particular IP, yet to be instructed by them, but yes we have advised this having sought Counsel and Legal opinion

      We will update when the bank make their internal redress offer

      Thank you for your comments

      • 4) You may find a fight on your hands about condition of lending then, if it was detailed in the longer term facility.

        6) I guess we can draw our own conclusions…

        8) Some of the decisions to tip businesses into administration appear illogical. Sounds like that might be the case here.

        Have you had input into the 166 review process?

        Happy to offer my further 2-penneth in due course.

  3. Pingback: Barrier to SME mis-selling justice raised as court fees rise 600%

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