The interest rate swap saga has been rumbling along for several years now (see my previous posts on the topic here and here), however it is only in the past few months that real and tangible progress has been made in redressing the wrongs of the banks and compensating those who have lost out to interest rate swap mis selling.
The Financial Conduct Authority (FCA) recently published its four month update on the banks' review of sales of interest rate hedging products or 'swaps'. This marks the first time that the FCA has provided a detailed breakdown of the potential liability faced by the nine banks that have signed up to the customer compensation scheme. Monthly updates from the FCA are now expected to follow.
According to the FCA, more than 25,000 sales are in the process of being assessed by the banks and the first letters offering compensation have been sent out. The FCA expects most customers will be informed of the result of their review and of any possible basic redress (the repayment of the sums paid by the customer under the 'swap') by the end of the year.
However, the FCA acknowledges that redress offers to customers also making a claim for 'consequential losses' may take longer due to their complicated nature, which cannot be easily defined by the compensation parameters thus far established.
Consequential losses are those additional losses that the customer has sustained which are over and above the direct costs of the swap which the customer has paid to the bank. Consequential losses can include overdraft charges, additional borrowing costs and lost business. They can often greatly exceed the direct costs.
When a bank accepts that a swap has been mis-sold, it will suspend the swap and put on hold the collection of any future payments under the swap. The bank will make an offer of basic redress to refund the direct payments already made and ask whether the customer has a claim for any consequential losses.
The banks have made it clear that they will not pay out a customer's basic redress without also settling any consequential loss claim. Only one offer will be made and there will be no further negotiation. If the customer is not prepared to accept the offer, the swap will be reinstated and the suspension on payments lifted. The customer will then be liable for both the backlog of suspended payments, the ongoing payments and the breakage costs. The customer would also be forced to litigate in the courts to seek full recovery. But, given the already dire financial state of many of these customers, they will simply not be able to afford to do so, forcing them to accept what they consider to be an inadequate offer made by the bank.
Furthermore, the legal tests adopted by the courts also differ from the issues that arise under the FSA Regulations and the banks consider as part of the review, and the courts have so far been noticeably unsympathetic to customers' claims against banks for the mis-selling of swaps.
The FCA emphasise that customers can seek redress from the banks without involving lawyers or claims management companies, however this is a short sighted statement as the banks are of course legally represented and use an established legal approach to determine a customer's entitlement to such consequential losses.
This involves consideration of whether the customer's loss was caused by the bank's breach (i.e. mis-selling the swap) and whether the loss was 'reasonably foreseeable' at the time of the bank's breach of the regulatory requirements.
As with every detail related to interest rate swaps, consequential losses are highly fact sensitive and claimants would be wise to seek legal representation to help them substantiate their claims and cut through the bank's questionnaires, in order to obtain their redress in as quick and painless a fashion as possible and to ensure that the offers of redress are indeed "fair and reasonable" to the customer and not the bank.
Andrew Brown is a Partner at Cardiff and London based law firm Capital Law www.capitallaw.co.uk. He is a specialist in financial disputes, in particular interest rate swaps.