The Times’ City Editor, Harry Wilson, one of the journalists that three years ago broke the news of interest rate derivatives mis-selling by the major banks, reports today (based on the first hand account of a KPMG whistleblower) on flaws in the FCA Interest Rate Hedging Product (IRHP) redress scheme in that Royal Bank of Scotland (RBS) executives aggressively sought reductions in the redress offered to victims of their mis-selling.
RBS minimised mis-sold IRHP compensation
A whistleblower has claimed Royal Bank of Scotland tried to minimise the amount of compensation paid out for mis-sold interest rate swaps. The Times reports that KPMG, which oversaw the redress programme over mis-sold derivatives, was “browbeaten” into accepting smaller settlements to small businesses.
A former KPMG subcontractor, who asked not to be named, told the newspaper swaps worth more than £750,000 were “almost always challenged” by the bank. The source said RBS pushed for firms to be given a new deal rather than their money back. They said:
“The bank did not want to pay out cash on these cases, nor meet high break costs if it was in any way avoidable. Considerable pressure was put on the review team by the bank to offer … an alternative product or, in some cases, to argue that it was a compliant sale with no redress.
“The higher the cost to the bank, the more the bank would argue with the reviewers and in some cases also with the skilled person seeking to persuade them to change their minds.”
A spokesman for RBS told The Times that it “refuted the allegations that have been made”; whilst a spokeswoman for KPMG denied “any suggestion that our work … has been in any way influenced by RBS.” The FCA claims it had “maintained close oversight of the relationship between the bank and their independent reviewers” and claimed the “allegation is not supported by the facts”.
Failings in the FCA IRHP Review
The Times’ investigative report into the IRHP mis-selling review scheme (together with the Rt. Hon. Guto Bebb MP and other political comments in today’s APPG parliamentary debate) highlight the inadequacies of the FCA’s IRHP redress scheme which was fundamentally flawed from the outset as it allowed the wrongdoer banks to review and redress their own wrongdoing.
Over a year ago, we provided critical research information to BBC Panorama and, on behalf of our SME clients, we wrote to Mr. Martin Wheatley, the Chief Executive of the FCA giving him personal detailed notice of the failings in and abuses of the IRHP review and to request him to take action. We warned in particular of the lack of independence of those appointed by the banks as so-called ‘independent reviewers’:
The fact that the banks are able to appoint their own “independent reviewers” at all casts obvious doubt on the independence of the reviewer and therefore also puts in doubt the proper scrutiny and oversight required for effective conduct of this Review. This is particularly the case where the appointed reviewer is a large financial services organisation who will inevitability have an ongoing relationship with the bank in question which they will be anxious to preserve.
At the time of writing we pointed out and and explained the following concerns:
A. Unreasonable exclusion of customers from the Review
B. Fettering of customers’ appeal rights against the sophistication assessment
C. Lengthy and unreasonable delays in conduct of the Review (leading to limitation issues)
D. Unfair and one-sided conduct of the Review
Subsequently, we now have direct knowledge that consequential loss claims (even those prepared by lawyers and forensic accountants) have been assessed in the IRHP review by former bank managers with no legal or accountancy qualifications and who are not therefore qualified to determine such claims based on ‘established legal principles’ (as promised by the FCA). Consequential loss claims are routinely rejected and the FCA appears to provide little statistical analysis in this regard. See our full letter to the FCA here:
Mr Wheatley failed to reply to this correspondence himself. Instead we received an anodyne response and consider it possible that no meaningful action was taken by the FCA in response to our and our clients’ shared concerns.
Short-changed SMEs: Alternative IRHP Product Redress
It is the above flaws in the FCA’s IRHP scheme which have lead to many SMEs being short-changed by alternative product redress. Such alternative products, the FCA indicated in their announcement FAQs, were only meant to be offered in circumstances where banks can show this is what the customer would have purchased had the bank complied with its regulatory obligations at the point of sale, using reasoning, evidence and customer testimony to demonstrate this.
However it appears evident that banks have routinely offered alternative product redress for example by way of offers that mis-sold cancellable swaps be replaced with so-called ‘vanilla’ swaps or structured collars be replaced with so-called ‘vanilla’ collars. All interest rate hedging products are classified as complex within the Markets in Financial Instruments Directive (MiFID) and in our view it is misleading to refer to any such products as ‘vanilla’. In many cases the alternative product offered costs the customer as much as the original product, so no cash payment is offered (indeed, sometimes the alternative product would have imposed higher costs on the customer, although in fairness to the banks, they do not actually seek to argue that their customers should compensate them for the difference).
Redress including such alternative products, reducing or eliminating the amount of cash payable to the customers, saves the banks billion of pounds in redress payments. Have the banks spent millions of pounds on their past reviews of derivatives sales, employing and engaging internal reviewers and so-called independent reviewers in order to save billions of pounds due to SMEs?
Appealing an IRHP Redress Determination
Given our and our client’s lack of faith in the IRHP scheme (which today was backed by adverse comments towards the review made by many MPs) we have been instructed to litigate many cases regardless of the FCA’s flawed IRHP review scheme. We have achieved successful settlements in the vast majority of such cases and are continuing to litigate in many more cases. Whilst the FCA implies that review outcomes have been determined and redress outcomes notified to customers, save for a small number who joined the review late, we know of at least one case where no redress determination has been provided in spite of the customer having provided its evidence for the review over a year ago and in spite of repeated promises to provide a provisional basic redress determination, which has apparently been being “finalised” since at least 30 May 2014.
It is likely that there are hundreds of poorly reasoned bank determinations of alternative redress where the real reason for an alternative product is to reduce the cost of the mis-selling payout for the bank. Examples we have successfully challenged using litigation and derivative expert advice include:
- A mis-sold bank callable swap being replaced with a swap which meant the redress sum was negative (around -£50,000) – until we recently issued litigation and made further written IRHP review submissions (resulting in the swap being cancelled altogether compensating our client around £600,000 plus consequential losses).
- In other examples, even where a swap was being replaced with a seemingly suitable IRHP cap, we assessed the caps were for a longer notional value than could ever be justified by the lending condition (or by derivatives market practice with respect to its term length or strike price) and on challenge have secured significantly greater compensation for our clients.
- We have experienced two Banks offering alternative products other than caps by claiming that a cap was offered but rejected – but upon investigation the only cap sales engagement the banks could point to was in relation to collars (which contain a cap as well as a floor) but no standalone cap was ever described to the customer.
The FCA indicated that legal advice was not necessary but failed to inform SME victims that banks like RBS were allowed to have a team of specialist lawyers to work on their behalf in the review scheme itself (in addition to their usual in-house legal team). Those with questionable alternative redress offers would be prudent to seek urgent (immediate) IRHP mis-selling legal advice in particular where the mis-selling was to individuals.
The Times: RBS ‘challenged size of payouts for rate swap damages’
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