UK’s Financial Conduct Authority (FCA) Publishes October Data On Banks' Review Of Sales Of Interest Rate Hedging Products.

FCA statement:

“Progress to this point has been slower than expected, but the latest figures show a significant pick up from earlier publications. We have written to the banks to make our expectations clear and agree practical ways to speed up the process.

“We have also agreed with HSBC, RBS and Lloyds Banking Group that they will split payments for redress relating to the swap and consequential losses to simplify and speed up the process. We expect the number of offers to increase over the next few months.”

Background

In 2012, the Financial Conduct Authority (FCA) identified failings in the way that some banks sold Interest rate hedging products (IRHPs).  The banks involved agreed to review their sales of IRHPs¹ made to certain customers² since 2001.  

The banks carried out a pilot exercise to test the review process. The FCA reported key findings of the pilot in January 2013. The banks agreed to conduct their reviews using the approach set out in the report. 

The banks and the independent reviewers needed to take the time to ensure that their methods were in line with the agreed approach.  This included building robust redress models, recruiting and training staff, and writing clear communications for customers. The full review started in May 2013.   

The review so far

You can see the number of sales at each stage of the review below.

Number of sales at each stage - overall view                                    Number of sales at each stage – bank-by-bank

This table summarises the banks’ progress and the position at the end of October:

The FCA reported that the banks were aiming to send out at least 1,000 redress determinations in October.  Actual figures were closer to 800 (450 ‘full tear up’ determinations, 200 alternative product, and 150 in relation to compliant and non-compliant sales where no redress was due).  

While almost all the banks made more determinations than they expected in October, one bank fell short mainly because of operational challenges. In addition, feedback from the independent reviewer meant offers were delayed.  This demonstrates the value of the independent reviewer, although we understand customer frustration that this further delays redress.  The bank has taken steps to resolve these issues and expects to be back on track in November.

Timings

Progress to this point has been slower than expected, but the latest figures show a significant pick up from earlier publications.

The FCA gave the banks six to twelve months to complete their reviews from the start of the process (May 2013) and are frustrated that they are all expecting to meet the lower end of the FCA expectations. 

The FCA expectation has been that the majority of customers who come under the scope of the review will have been informed of their compliance assessments and, if applicable, will have received an initial basic redress offer by the end of the year. Additionally, the FCA expectation has been that the whole process will have been completed within 12 months of starting.

Current trends indicate that the banks may not meet this timetable so the FCA have written to the chief executives of the four major banks to make our expectations clear and agree practical ways to speed the process up.    

As part of this, the FCA have agreed with HSBC, RBS and Lloyds Banking Group to split payments for initial redress and consequential loss, and have encouraged other banks to follow their lead. This decision should simplify and speed up the process for paying basic redress to customers.  The FCA will be closely monitoring this to ensure it is having the right impact.

The FCA would also like to encourage the 4,000 customers yet to opt-in to the review to do so as quickly as possible.

Redress for consumers

The IRHP review has been set up to deliver fair and reasonable redress to customers where appropriate without the necessity to hire lawyers or claims management companies (although some customers may want to consider seeking legal advice if they are considering a separate legal action). 

The only action customers need to take to have their case assessed is to opt-in to the review and then share any relevant evidence or testimony that they have on how the sale was conducted. 

The banks have agreed to offer customers 8% simple interest on top of redress payments and is intended compensate customers for the opportunity cost of being deprived of their money (e.g. lost interest or profits).  For many customers, taking into account the economic environment over the last five years, this will represent a straightforward and fair alternative to putting together consequential loss claims which are likely to take longer to assess. Independent reviewers will oversee the review process from start to finish, ensuring that the outcomes provided to customers are fair and reasonable.

How cases are assessed

It is vital to the success of the review process that significant time and resource goes into reviewing each sale.  Every case is different and the specific facts and customer circumstances must be understood and carefully considered in arriving at a redress offer that is fair and reasonable. 

The banks and independent reviewers have employed 2,800 people to review cases, and have so far collated and reviewed in excess of 5m documents.

Find out more about:

• ·         How the review process works

• ·         Fair and reasonable redress and what can likely be claimed as a consequential loss

• ·         Illustrative examples of fair and reasonable redress offers

• ·         Businesses in financial difficulty, businesses in administration and dissolved companies

¹For these purposes, we mean IRHPs that are derivatives which are separate to a lending arrangement and are for the purpose of managing interest rate fluctuations.

²That is, customers classified under our rules as either ‘private customers’ (in relation to sales made on or before 31 October 2007) or ‘retail clients’ (for sales made on or after 1 November 2007), and assessed as being eligible for the review under the ‘sophistication test’.

Background

1. On the 1 April 2013 the FCA became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA).
2. The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers.
3. Find out more information about the FCA, as well as how it is different to the PRA.