The Royal Bank of Scotland PLC (RBS.L) has settled a High Court claim  over the mis-selling of two complex collar derivatives  in 2007 to Mehnaaz Chaudhry, a businesswoman who provides residential care and social support services to disadvantaged children and families in London.
RBS denied any liability in spite of agreeing to suffer a total financial cost in excess of one million pounds in the settlement, which includes repaying 92% of Ms Chaudhry’s direct losses.
Under the litigation settlement, which comes just before the High Court trial (which was scheduled to start on 13th June 2016), RBS has agreed (i) to return nearly £600,000 in respect of derivatives payments previously paid by the customer plus interest, (ii) to pay the break cost of the two hedging products estimated at up to £300,000, and (iii) to pay all suspended payments in respect of the two hedging products estimated in the sum of around £100,000. The litigation settlement has cost RBS around one million pounds.
Good litigation cases settle
Often, such settlements contain confidentiality clauses and the details cannot be placed in the public domain. On this occasion, however, the customer settled the litigation without confidentiality in order to expose RBS’s misconduct and the flaws of the Financial Conduct Authority agreed IRHP review scheme  to the wider public. In the review scheme, RBS was allowed to self-review and self-determine redress in respect of its own past sales of derivatives with minimal regulatory oversight save under the auspices of a so-called ‘independent reviewer’, in this case, KPMG, whom RBS selected and appointed. This voluntary arrangement was agreed by the regulator in spite of the FCA publishing a finding of mis-selling in 93% of IRHP sales examined in a pilot review scheme.
Abuse of the IRHP Review scheme
Unfortunately, some banks, RBS in particular, avoided paying proper redress by unfairly applying the rules of the review scheme (which they helped create) to reduce redress paid to customers. RBS regularly replaced derivatives mis-sold to customers with alternative hypothetical derivatives that simply do not exist in the real world, for example in this case 15-year caps. These unfair alternative derivatives effectively allowed RBS to unfairly reduce redress payable to customers.
Guto Bebb MP has openly challenged RBS over this compensation avoidance technique in the past (see 4 December 2014 parliamentary debate on the FCA redress scheme in particular at Hansard 4 Dec 2014 : Columns 480 and 481).
It is likely that RBS has avoided more redress payments by way of alternative derivatives than any other bank. Hundreds of business customers, whose legal rights may have expired for want of litigation (as they trusted the regulatory review scheme) and whose appeal to the Financial Ombudsman Service is limited to £150,000, have been left with little choice but to accept poor redress offers from RBS. Such customers should have taken, and should still take, legal advice.
Lessons for the FCA
John Griffith-Jones, the Chairman of the FCA, has indicated to a parliamentary Treasury Committee that Andrew Bailey, the soon-to-appointed Chief Executive of the regulator, will review how the FCA deals with redress schemes after he takes up the role in July 2016.
It is understood that Mr Bailey will work with the regulator’s board to draw upon its experience of dealing with issues including mis-sold payment protection insurance and interest rate swaps and will also question how the FCA should operate redress programmes in future. Mr Griffith-Jones said:
“One of the crucial things Andrew Bailey and the board will look at when he arrives is how we deal with these redresses. How do we get a scheme to begin and end to the satisfaction of everybody that we’re doing a decent job? If you look at PPI or swaps, or other difficult cases, it’s still a work in progress. It’s very easy to start these things, but it seems very difficult to finish them.”
Litigating ensured proper redress
This case is highly relevant to how the IRHP review has been unfairly operated by RBS. The High Court litigation ran in parallel with the IRHP review scheme, which was considered to amount to alternative negotiations leading to settlement. Whilst denying all wrongdoing in the litigation, RBS admitted in the review that it had failed to properly explain the huge risks of the derivatives products that it had offered. However, rather than provide fair compensation to the customer for its mis-selling, which had cost the customer almost £400,000 in derivatives payments (together with around £350,000 breakage cost exposure), RBS instead only offered redress [Alternative Redress Presentation] with a total financial value of around £300,000 by insisting on replacing the two mis-sold collars with one further costly collar and a costly 15-year cap. This unreasonable decision by RBS was challenged by way of explanatory meetings and written submissions in the Review and by simultaneous pursuit of High Court litigation. This pressure forced RBS to drop its demands for replacement collars and offer replacement caps, which massively increased the total financial value of its redress offer to around £1m.
RBS – a reputation for behaving badly
RBS has thereby demonstrated its ongoing unwillingness to genuinely put right its past wrongs by forcing its clients to pursue litigation and waiting until the eve of trial to settle such litigation. This is entirely unnecessary and reveals RBS’s aggressive approach towards its IRHP mis-selling victims.
Ms Chaudhry, the customer whose ability to perform her leading social care services work in London was restricted by RBS’s mis-selling of these complex derivatives products, stated:
“I was mis-sold two collars by RBS that caused massive unexpected financial losses which affected my ability to provide additional social care support in East London. I have battled with RBS for over six years and finally, on the eve of trial, and after having been ordered to hand over its IRHP review documents, RBS made their first and only litigation offer. ”
“RBS was ordered by the High Court to disclose its IRHP review documents in my case which revealed admissions of wrongdoing that undermined RBS’s three year defence of this litigation. Whilst I am relieved that my six-year dispute with RBS is at an end I feel aggrieved that RBS behaved as badly as it did, first in mis-selling and then in the FCA IRHP review and finally in forcing me to the door of the court to test my resolve. I understand this is because many customer eventually give up or settle for low amounts.”
“When first taking on my business, the RBS commercial team were courteous, flexible and helpful however once they got my business and tied me into the collars, RBS were not interested in the negative impact on my business and have been arrogant and dismissive of me ever since. RBS ought to treat their customers with more honesty, respect and fairness.”
“The litigation was vigorously defended by RBS, but just weeks before the trial, RBS was forced to settle the litigation claim in order to avoid judicial scrutiny and judgment over both its mis-selling and its conduct of the IRHP Review scheme.”
“This case is the first in which RBS were ordered, upon application by the Claimant, to hand over all documents generated in the IRHP review scheme. In spite of the clear civil procedure rules on disclosure, RBS had wrongly refused to disclose IRHP Review documents until they were forced to do so by an order of the High Court.”
“RBS defended the disclosure application with much vigour, even appointing heavyweight banking silk, Adrian Beltrami QC to strengthen their legal team . However in spite of the bank’s protestations, the Chief Master of the Chancery Division of the High Court ordered RBS’s solicitors, Dentons, to redo RBS’s disclosure exercise and ultimately to disclose the review scheme documents.”
“The customer did not fully understand the Collars and therefore RBS should not have sold them. RBS failed to fully explain the risks associated with the Collars, in particular break costs. Had the customer fully understood the complexity and risks of the Collars, she would not have entered into them and would have chosen alternative hedges. The Collars were over-priced at inception by between 149% and 169% whereas the customer could have had more effective hedges at a fraction of the cost.”
“The FCA-agreed IRHP review scheme has failed to ensure customers get fair redress and instead has significantly reduced the cost of compensation that is truly owed by banks to victims.”
- RBS sales staff were incentivised to sell complex collars to benefit the bank rather than hedging to benefit the customer. RBS made £79,968 profit by mis-selling the complex derivatives.
- RBS failed to disclose the contingent liabilities (estimated break costs risk) of £276,000, even though they had calculated the break costs risk and used up the customer’s credit limit to that extent under an RBS process called ‘Credit Limit Utilisation’ which, unlike all other credit applications, was not discussed with the customer.
- This litigation has cost RBS well over one million pounds (including around £130,000 in legal costs). RBS could have settled the matter much sooner but purposely chose not to and instead conducted their review slowly and continued to defend it inappropriately, for example by refusing to disclose documents despite their duty to the Court to do so.
- The FCA allows banks to review their own past sales of derivatives and decide the level of redress to pay; RBS attempted to get away with paying only £300,000 but were forced to pay out over three times that amount thanks to the pressure of the litigation which was run in parallel with the review scheme.
- RBS tried to reduce compensation by proposing the customer takes out replacement derivatives that she did not want. RBS initially proposed a replacement collar and a 15-year cap in the review which would cost the customer an additional £238,476 plus lost interest (at 8% per annum) which was an attempt to avoid compensation by RBS.
- 15-year caps are an invention of the RBS review scheme; there are no commercially known examples of any SMEs ever purchasing longer than approximately 5-7 year caps. Guto Bebb MP has openly challenged RBS over this compensation avoidance technique in the past (see 4 December 2014 parliamentary debate on the FCA redress scheme in particular at Hansard 4 Dec 2014 : Columns 480 and 481).
- FCA’s new Chief Executive, Andrew Bailey, will be examining the conduct of past voluntary review schemes to consider if Banks give customers fair redress.
- NatWest/RBS and the FCA are likely to announce an FCA-agreed GRG Review scheme for victims of NatWest/RBS’s Global Restructuring Group which is alleged to have engineered loan defaults to deprive customers of valuable assets, for example by stripping those assets into West Register companies that the banks own.
Vedanta Hedging is the largest FCA-regulated hedging advisory organisation in the UK for SMEs and has advised hundreds of clients in connection with the mis-selling of derivatives in both the FCA-backed IRHP review scheme and in litigation by providing expert witnesses. The Managing Director, Mr Abhishek Sachdev, can be contacted by telephone on 020 7183 2277.
LEXLAW Solicitors & Barristers is a unique law firm that partners solicitors and barristers and is the only law firm based in the Middle Temple (an Inn of Court). The firm has conducted more litigation in respect of derivatives mis-selling to SMEs than all other law firms in the UK combined. The partner in this case, Mr M. Ali Akram, can be contacted by telephone on 020 7183 0529.
Mehnaaz Chaudhry is a provider of social support services to children and families in London. She has a BA (Hons) in Social Work, a Post-Qualifying Social Work Award and an Award for Academic Excellence in Social Work. Ms Chaudhry can be contacted for further comment via her solicitor, Mr Kumaran Sivathillainathan by telephone on 0207 183 0529.
 Mehnaaz Chaudhry & Another v. The Royal Bank of Scotland PLC (High Court of Justice, Chancery Division, Claim No: HC-2013-000489); proceedings were commenced on 17 October 2013.
 The derivatives were: (i) a £1.58m Amortising 15-year Collar sold on 3 December 2007; and (ii) a £0.62m Amortising 15-year Collar sold on 3 December 2007.
 See letter to the FCA dated 10 October 2013 titled Notice of Failings in and Abuses of the IRHP Review.
 RBS instructed Matthew Arnold Baldwin (now Dentons) partner, Mr Stephen Mills and associate, Mr Samuel Parr. Adrian Beltrami QC of 3 Verulam Buildings and Daniel Edmonds of Fountain Court were counsel.