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FCA IRHP Swap Review: How to appeal an unfair ‘Sophisticated’ Customer classification.

Following the Swift review which accepted arguments raised by this firm, the FCA have (very quietly) confirmed that IRHP swaps mis-selling victims that were previously denied redress for apparently being “sophisticated” customers may appeal their exclusionary classification.

In June 2019, the FCA appointed Mr John Swift QC as an independent reviewer for the lessons learned review commissioned by the FCA’s board. His 493 page report is available here. LEXLAW is the leading law firm representing SME victims of the mis-selling by major banks of complex interest rate hedging products (IRHPs).

Bank Exclusion of 34% of IRHP victims by labelling them as “Sophisticated”

Whilst the FCA Review scheme paid out over £2.2 billion in redress, over a third of customers were excluded by bank contrived changes to the redress scheme to exclude compensation on the biggest cases.

The Swift Report determined that following Bank persuasion, the FSA (as it then was) allowed the scope of the entire FCA IRHP Review Scheme to be limited to ‘non-sophisticated’ customers. The Initial Sophisticated Customer Criteria meant that customers would be classed as sophisticated if they had at least two of:

(i) a turnover of more than £6,500,000,

(ii) a balance sheet total of more than £3,260,000, or

(iii) more than 50 employees.

In addition, customers (even if they fell below the quantitative criteria) would also have been classed as sophisticated if the relevant bank was able to demonstrate that, at the time of the sale, they had the necessary experience and knowledge to understand the service provided and the type of the product, including their complexity and the risks involved.

LEXLAW’s Campaign against Sophistication Exclusion

We have previously written to the FCA in 2013, on behalf of our SME clients who have been mis-sold IRHPs by a wide range of banks (including Barclays BankHSBCLloyds Bank, the Royal Bank of Scotland and Clydesdale and Yorkshire Banks ) to share their grave concerns about the review, which views we share.

LEXLAW also wrote to Mr John Swift QC, putting the FCA on (repeated) notice of its failings in relation to the Financial Conduct Authority’s (FCA) implementation and oversight of the Interest Rate Hedging Products (IRHP) review and redress scheme.

A copy of our letter to John Swift QC appears at this link headed “REPEATED NOTICE OF FAILINGS IN THE FCA’S IMPLEMENTATION AND OVERSIGHT OF THE INTEREST RATE HEDGING PRODUCTS (IRHP) REVIEW AND REDRESS SCHEME”. You will note in particular that we attacked the exclusionary sophistication criteria which was clearly designed to arbitrarily exclude proper redress and thereby to save major banks billions of pounds in redress that was truly due.

How to Appeal a “Sophisticated” Customer Classification to the FCA (14 December 2022 Deadline)

It has been announced (via The Times’ James Hurley) that the FCA will accept sophistication assessment appeals until 14 December 2022. Such appeals can now be lodged for customers that were classified as sophisticated yet in spite of its failings the FCA has not written to alert the 5000 customers or directed the banks to do so. The regulator’s approach is that complaints should be made within a year of the date on which the complainant first became aware of the circumstances giving rise to the complaint. As the Swift Report was published by the FCA on 14 December 2021, this means companies only have a short time left to register their complaint. This deadline and complaints policy have not been publicised, only appearing in FCA board minutes.

An FCA spokeswoman said to the Times: “We will always investigate complaints made within 12 months of the issue being known to the complainant, and we also have the flexibility to investigate complaints raised after that time so long as reasonable grounds for delay are shown.”

Since 2011, we have developed a leading track record in obtaining many millions of pounds of redress compensation and damages. We issued more claims against major banks for the mis-selling of IRHPs and hidden swaps than all other UK law firms combined. We are still conducting cases in particular for individuals sold fixed rate loans with hidden swaps embedded in them causing huge break costs.

We are well equipped and able to assist those that wish to lodge a detailed appeal to the FCA by making written submissions on behalf of customers that previously received a sophisticated customer classification. Given our track record, experience and specialist knowledge and understanding, we are readily able to identify and appeal aspects of cases that highlight major banks unreasonably excluding customers from the FCA IRHP Review scheme by improper application of the Sophistication Assessment process.


If you wish to lodge a detailed submission to seek to overturn your sophisticated customer assessment you must act as a matter of urgency. We understand what arguments work and can be instructed to lodge a detailed statement on your behalf. Please get in touch with our Financial Services Litigation team on 02071830529 or by email/contact form.

Customers were only able to have their cases considered under the Review if they were assessed by the banks as being “non-sophisticated” customers. It is therefore concerning that allowing the banks to decide which customers were included in the Review allowed the banks to unfairly exclude some of their customers from the Review. We note from the FCA that over 34% of IRHP sales were excluded from the Review on the basis that those customers were allegedly “sophisticated”. However, we know from our own experience that this included customers who were not sophisticated in any normal sense of the word.

It was and remains a major source of concern that any customer who disagreed with their bank’s decision to classify them as “sophisticated” had to appeal to their bank rather than to an independent body capable of making a fair and independent decision.

Case Study 1: Lloyds Bank’s efforts to deny Company C Redress via the FCA Review

By way of a first example, we wrote to Lloyds regarding their erroneous assessment of our client, Company C, as “sophisticated”. However, despite the arguments advanced on behalf of Company C, Lloyds were able to continue improperly excluding our client from the Review, and our client had no effective recourse to obtain regulatory redress and had to turn to litigation.

Company C, which was sold two Category A interest rate hedging products by Lloyds on 24 July 2007, and was sold another Category A product on 1 December 2008 (with Category A being the category designated by the FCA for the most complex interest rate hedging products). On 27 September 2012, Lloyds wrote to Company C to confirm that they had been assessed as a “non-sophisticated” customer and were included in the pilot Review for the sales of all three products.

Company C was asked to provide additional information to Lloyds in order to “assist us with the Review of your cases”, and provided this information in October 2012. Company C then met with Lloyds under the Review on 25 October 2012, and then heard nothing further from Lloyds about the Review, even though customers who had been sold Category A products should have proceeded straight into the redress phase.

Following the FCA’s revision of the sophistication assessment criteria on 31 January 2013, Lloyds decided to erroneously re-assess Company C as instead being a “sophisticated” customer. However, for reasons that Lloyds failed to explain, Lloyds failed to communicate this decision to Company C until 23 August 2013, even though the applicable limitation date was on 24 July 2013 (being six years after the first sale).

Fortunately, Company C sought legal advice in time and protected its limitation period by issuing a protective claim form in July 2013, and subsequently obtained redress through litigation. Under this settlement, which was reported in the Sunday Times, Lloyds agreed (i) to pay £890,523.98 GBP in respect of all derivatives payments previously paid by the customer, (ii) to bear the break cost of the one extant hedging product estimated in the sum of around £3.5 million GBP, and (iii) to pay £200,000 GBP towards the care home’s legal costs. The litigation settlement cost Lloyds Bank Plc in the region of £4.6 million GBP, which amounts to almost the entire claim value, although the bank continues to deny any liability and evaded paying any compensation in the FCA Review via self-assessing Company C as “sophisticated”.

Case Study 2: Family K – Denied over £1m Redress in the FCA Review by being wrongly classified by the Bank as Sophisticated

By way of a further example, we also refer to the experience under the Review of another of our SME clients, Family K, who agreed a suspension of payments under their interest rate hedging product with Lloyds in February 2013. However, Lloyds stated that it could terminate that suspension in the event that Family K was notified that “you are not within scope of the Review because you are a “sophisticated customer”. Lloyds subsequently stated in May 2013 that it had classified Family K as an intermediate/professional customer, as a result of which our client was required to resume making payments that it could not afford. Despite repeated requests by us, Lloyds declined to provide any explanation of this incorrect classification, which only served to wrongly exclude Family K from the Review.

As the case fell just inside the limitation period, Family K instructed us to investigate and commence legal proceedings, following which Lloyds were forced to pay Family K full compensation (in excess of £1 million) for the mis-sold product. It is of grave concern that, had circumstances been slightly different, Family K might have been unjustly excluded from any effective redress by their apparently arbitrary exclusion from the scope of the Review.

There does not appear to have been any objective basis for determining whether a particular customer is “sophisticated”, and this unfair application of the sophistication assessment was symptomatic of a review process that allowed the wrongdoer banks to determine their own regulatory misconduct.

Case Study 3: Company G – Retail Client Excluded by Improper Sophistication Assessment Criteria

In addition to the significant issues concerning the application of the sophistication assessment by the banks (as explained above), there were also fundamental flaws in the criteria contained within the sophistication assessment itself.

We refer with great concern to the experience of our client, Company G, who was classified by Yorkshire Bank as a retail client before being sold an interest rate swap on that basis in May 2008. Company G was classified as a retail client rather than a professional client because Yorkshire Bank correctly recognised that our client did not have any experience or knowledge of interest rate hedging products and was therefore non-sophisticated.

However, Yorkshire Bank subsequently attempted to exclude Company G from the Review by including the turnover and net assets of Company G’s parent company and thereby mis-classifying Company G as a “sophisticated” customer (under the revised sophistication assessment criteria).

Retail clients such as Company G are entitled to the “most regulatory protection” and it is therefore unacceptable that the FCA allowed wrongdoer banks to deny their SME customers any regulatory protection even when those customers were previously considered (at the time of sale) to be non-sophisticated.

Excluding Customers by Bank Assessment of Customer Experience and Understanding as to Risks

In addition, according to the FCA’s own flowchart about the Review, there was a stage in the sophistication assessment where a bank could decide that a customer had, at the time of sale, “the necessary experience and knowledge to understand the service to be provided and the type of product or transaction envisaged, including its complexity and the risks involved”, thereby defining that customer as “sophisticated” and so excluding that customer from the Review.

However, there were no stated parameters as to how a bank should decide whether a customer actually had that level of experience and knowledge in relation to interest rate hedging products at the time of sale. Therefore, given the astonishing level of discretion allowed to the banks in making this decision, it was possible for a bank to arbitrarily exclude a customer from the Review by claiming that the customer had the requisite level of knowledge and experience.

Unreasoned Exclusion of £10 million+ IRHP Customers as automatically Sophisticated

Furthermore, we also note that customers were defined as sophisticated (and therefore excluded from the Review) if they had existing IRHPs with a total value of more than £10 million. However, this criterion was flawed and unjust: what would happen if a customer who had a loan of £3 million with a bank was sold £11 million in IRHPs (which that customer could not afford to break) by that bank?

Under the criterion in the Review, that customer would have been assessed as “sophisticated” and excluded from the Review, even though that customer would have been the victim of substantial over-hedging by its bank.

Given that the FCA noted back in June 2012 that over-hedging had been a recurrent problem with the banks’ mis-selling of IRHPs, this was a disturbing and illogical omission by the FCA and only served to deny redress to many customers who suffered most from the banks’ mis-selling of IRHPs precisely because of the high and excessive value of the IRHPs in question.

Instruct us to handle your appeal promptly – Deadline of 14 December 2022

It is now possible to appeal to the FCA even if you have litigated, depending on the facts and circumstances of your case and the method of your exclusion. The FCA are not publicising or instructing the banks to write to “sophisticated” customers about the availability of this appeal. This is undoubtedly in order to minimise the number of complainants and to save the major UK banks billions of pounds in compensation. If you wish to appeal you must act promptly.

We’re the only City of London law firm that operates from professional legal chambers in the Middle Temple (a Barristers’ Inn of Court) opposite the English High Court. Our dual-qualified solicitors & barristers will advise on the merits of your specific appeal case and deliver the best legal strategy to give you the optimal chance of reversing the bank sophistication assessment decision. Get in touch with our team: ✉ [email protected] | ☎ 02071830529

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