UHY Hacker Young Advising corporate clients in relation to claims for mis-sold Interest Rate Hedging Products

How to Identify Swaps

• There will normally be separate documents (from any underlying debt facility) which identify a Swap, these may be a trade confirmation, presentation and/or terms and conditions (e.g., an ISDA).
• The product will normally have been ‘sold’ to the customer by someone from the Banks’ treasury department.
• The business will have been locked into paying high interest rates (between 3.5 - 8%) at a time of historically low base rates.
• There may be substantial costs to exit the product, depending on remaining term.

Introduction & Overview

• June 2012 - FSA announces there have been ‘serious failings’ in the sale of interest rate hedging products by banks (“IRHP”)
• January 2013 the FSA published the results of a pilot review 90% of those reviewed had been mis-sold.
• It took 4 high street Banks and the FSA approximately 5 months to review these 200 cases and reach this conclusion
• 11 of the UK’s largest banks have now agreed to provide redress if mis-selling is proven
• The 4 largest UK banks have combined provisions of circa £2.3bn against IRH
• Mis-selling an increase from £800m only 6 months ago.
• The FSA has estimated there are 40,000 potential cases now to review.
• The bank’s solution is to review their own cases and decide if they have been at fault, albeit they are subjected to “independent” scrutiny from a major partner accountancy Firm
• Banks are actively advising the affected business NOT to take their own independent advice in relation to these highly complex claims.
• Businesses need to be conscious of the issue of ‘limitation’ as there is a strict 6 year timeframe within which businesses can bring court proceedings (if this is deemed the appropriate course of action for pursuing the claim). This makes it essential for businesses to take advice urgently.

The Process

The process for pursuing a mis-sold interest rate hedging product are as follows: 

• Conduct a detailed preliminary review of the documentation including IRHP contracts and circumstances surrounding the sales process
• Establish and qualify key issues to validate the claim
• Approach the bank to obtain any “missing” documentation
• Quantify the size of claim including consequential losses
• Agree strategy with the client
• Draft and issue the letter of claim to the Bank
• Document any necessary legal “standstill” agreements with the Bank
• Where appropriate engage third-party external experts - specialist legal counsel
• Manage the negotiations with the bank through to conclusion

IRHP Overview

There are principally four categories of Interest Rate Hedging products:

• Swaps (A contract to fix interest rates)
• Caps (A ceiling on interest rate rises)
• Collar (A defined interest rate range)
• Structured collars (Client rates may increase above the collar floor)

These products were widely sold by Banks between 2005 – 2010 in conjunction with loan products with the intention to minimise borrowers risk to interest rate fluctuations (note the FSA Scheme includes products sold from 2001).

The situation:

The products are complicated financial derivatives which were marketed often with an expectation rates would rise

• Many of the products were financially speculative and very complex
• The downside consequences of entering such contracts were unclear and often not adequately explained/disclosed by the Bank
• These products were often a pre-requisite of the Banks agreeing new facilities
• The Banks actively incentivised their teams to market these products
• The financial impact of servicing and exiting contracts have been punitive
• Exit and break fees are significantly disproportionate to amounts borrowed
• Successfully exiting these contracts with appropriate redress is not straightforward and needs specialist advice

FSA Findings

In June of this year the FSA announced that there have been ‘serious failings’ in the sale of interest rate hedging products and have gathered evidence which ‘raises concerns’ about the sales they have reviewed in certain banks.

The FSA found evidence of a number of poor sales practices across a number of products. These practices varied across banks and included:

• Poor disclosure of exit costs
• Failure to ascertain the customers’ understanding of risk
• Non advised sales straying into advice
• ‘Over-hedging’ (i.e. where the amounts and/or duration did not match the underlying loans)
• Rewards and incentives being a driver of these practices
• Poor record keeping

As a result, and under the oversight of the FSA, 11 of the UK leading banks are now working with independent reviewers to provide fair and reasonable redress for customers with certain types of hedges and review the sales of other interest rate hedging products.