FCA IRHP Review

The FCA Interest Rate Hedging Product Review Scheme is open to all companies, solvent or insolvent

http://www.fca.org.uk/consumers/financial-services-products/banking/interest-rate-hedging-products/businesses-in-financial-distress

The FCA web site allow you to look into process of the review. The review is meant to act as an alternative to taking Litigation for a miss sold IRHP. The process is simple and customer friendly, allowing a no cost option to bring about your claim for a miss sold financial product. The scheme allows the previous Director and/or Shareholder to give their version of events and evidence to allow the process to be fair and reasonable

It may be necessary to have your Insolvency Practitioner (IP) enter the scheme through complaining to the bank first. The product types are ‘categorised’ with only a few being automatically entered into the review scheme (category A)

We then recommend that the IP requests information from the bank to allow you to undertake a written and/or oral fact find to detail your ‘case’. The following letter template covers most of the required information ;

Dear BANK

Re XYZ LTD in Administration

I refer to the above company(s) and write to request information to allow us to understand better, in a fair and reasonable manner, the process of sale involving the Interest Rate Hedging Product sold by NAME on DATE to XYZ Ltd. The information we would like;

• All correspondence and emails relating to the IRHP and loans
• All correspondence and file notes relating to the IRHP and loan, including any liabilities the company has from them; market to market breaks and contingency liabilities
• All correspondence, including emails, presentations (product profile, terms sheets and file notes), from the Investment Bank part of the Bank relating to the IRHP
• A transcript of the recorded sale of the IRHP made by phone, which is recorded and kept by the bank. It details the actual deal done
• All documents that were signed by XYZ Ltd in relation to the Swap and Loans, including any audit (PN16) requests and replies
• The confirmation of the hedging product
• Copies of all facility, credit files and loan agreements
• All correspondence in relation to all complaints, verbal or written

I would also like you to consider that in the event of a miss sale being proven and redress being awarded, that BANK do the honourable thing and do not capture any monies paid to the Insolvency Practitioner, allowing distribution to the company creditors and shareholders.

Yours ……

If the Insolvent company is entered into the review you have the opportunity to assist the process and evidence any miss sale that may have occurred. The FCA review centres around the following main breaches in the sales process;

•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 FCA have rules – COB and COBS, pending date of sale. The review looks to see if these rules were observed. Examples of breaches in the FSA (now FCA) Pilot Scheme were detailed in a report produced in March ’13. The footnotes to this report were;

Customers categorised under our rules as either “private customers” (in respect of sales made between 1 December 2001 and 31 October 2007) or “retail clients” (in respect of sales made since 1 November 2007). For example, COB 2.1.3 R, COB 5.2.5 R, COB 5.4.3 R to COB 5.4.6 E and COB 5 Annex 1 for sales up to 31 October 2007, and COBS 2.1.1 R, COBS 2.2.1 R, COBS 4.2.1 R, COBS 14.3.2 R for sales from 1 November 2007. In addition, Principles 6 and 7 applied throughout the period.

Based on these rules, we would, for example, expect that for sales within the review:

The bank provided the customer with appropriate, comprehensible and fair, clear and not misleading information on the features, benefits and risks associated with the IRHP in good time before the sale.

If the IRHP exceeds the term or value of any lending arrangements, the potential consequences were disclosed to the customer in a comprehensible and fair, clear and not misleading way.

In relation to an advised sale:

A) The bank has obtained sufficient personal and financial information about the customer, including the customer’s investment objectives, level of education, profession or former profession and relevant past experience of IRHPs.

B) The bank has taken reasonable steps to ensure that the personal recommendation is suitable for the customer.

It is then a matter of submitting a written statement of the sales process or undertaking a face-to-face fact find meeting. The fact find process aims to gain an insight into what happened pre and at the point of sale.

The following information was provided by the bank to an IP ;

What the Fact Find is about

To assist the Bank in determining an appropriate outcome for your case, the following are a number of areas where additional relevant information would assist the assessment:

• Details of why you entered into the product(s).
• Details of any advice you received during the sales process and by whom.
• Details of why you felt you needed this product at the time and how it matched (or did not match) your needs.
• Details of your understanding of any conditions you felt were associated with the sale(s) of the product(s) at the time.
• Details of whether you had any specific concerns in relation to the original sales process. If possible, please provide any evidence that these were raised before/at the time of the sale(s).
• Detail whether there are any additional losses and/or costs that you would like the Bank to consider.

Additional losses and costs will only be considered where redress is determined to be due in relation to the sale of the IRHP(s). Additional losses and costs are defined as:

• Consequential Losses – losses over and above any redress that is determined to be due and which may have been caused by non-compliance with regulatory requirements during the original sales process.
• Net Tax Costs – tax implications arising from receipt of any redress that is determined to be due.

You will also have the opportunity to provide the Bank with information in respect of additional losses and costs after the outcome of the review is communicated to you.

Please note that if the outcome concludes that no redress is due to you, a claim for additional losses and costs will not apply.

Where possible, please provide copies of any additional evidence that would support your case.

This guidance is intended to assist you in identifying information that you may wish to provide and is not intended to limit your submission in any way. Your submission should be signed and include your confirmation that the facts stated therein are true to the best of your knowledge and belief.

Principal Of Redress

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.

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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